Reversal of domestic and international grain prices: Chen Xiwen suggests taking a rational view

All sectors of society are very concerned about the grain issue, so I will focus on this issue.

From the perspective of the domestic production situation, this year is the 12th consecutive year of grain production increase. Output is expected to reach about 1.23 trillion jin. Compared with 12 years ago, annual output has increased by more than 360 billion jin. This is a truly remarkable achievement.

At present, public attention to the grain issue is focused on two aspects: first, for some time, China's domestic grain prices have been noticeably higher than the international market, creating a reversal of domestic and international grain prices. Second, whether the ongoing reform of the grain price formation mechanism will affect farmers' incomes.

China's domestic grain prices are indeed noticeably higher than the international market. Based on average prices from January to September, the wholesale price of wheat in China is about 37% higher than the duty-paid cost of imported foreign wheat within the tariff quota, rice is 42% higher, and corn is 51% higher.

This situation emerged after 2012. What is the reason? Mainly to protect farmers' interests, in recent years the government has continuously raised the minimum purchase price for grain and the temporary storage purchase prices for corn and soybeans. This year still implements the prices set in 2014. Compared with 2011, the 2014 domestic minimum purchase prices raised early indica rice by 32%, middle and late indica rice by 29%, and japonica rice by 21%, while the temporary storage purchase prices for corn and soybeans rose by 13% and 20% respectively. It is not hard to see that the domestic and international price gap is noticeably larger than the scale of domestic price increases. This shows that such a large price gap is not entirely due to rising domestic grain prices; there must be other reasons.

What are the other reasons? There are mainly three aspects: first, since 2011, international grain prices have fallen sharply. After the global financial crisis broke out in the autumn and winter of 2008, countries around the world basically adopted strong fiscal and financial stimulus policies. Under a large supply of money, a round of general inflation appeared, so commodities such as grain were greatly affected and prices rose noticeably. But the subsequent global economic recovery was very slow, and then a new round of tightening appeared. Commodity prices fell noticeably, and grain prices did the same. Compared with the peak international grain prices in 2011 and 2012, current international market grain prices have fallen by 40% to 50%. It can be said that the main reason domestic grain prices are higher than international market grain prices is the sharp fall in international grain prices. Second, since China's exchange rate reform, the RMB exchange rate against the US dollar has continued to rise. At present, the RMB exchange rate against the US dollar has risen by at least 25%. This means that agricultural products settled in US dollars, after being converted into RMB, will fall in price on the Chinese market by about 25%. Therefore, changes in the RMB exchange rate will noticeably affect the price gap between domestic and international grain. Third, in the past one or two years, international energy prices plummeted, causing international shipping prices to plummet. Grain is a bulk commodity, and international trade basically relies on sea transport. In 2008, the freight rate from the US Gulf of Mexico to Huangpu Port in Guangzhou, China, was 135-138 USD/ton. By September 2015, this price had fallen to 32 USD. Because of changes in the exchange rate and sea freight prices, the price of imported grain fell by at least more than 1,000 yuan (RMB) per ton compared with before 2011.

Although the reasons for the domestic and international grain price gap are complex, there is no doubt that efforts must be made to improve the competitiveness of Chinese agriculture. Therefore, reforms must be carried out in the grain price formation mechanism, grain subsidy policy, and grain purchase and storage system. Some of these reforms have already been introduced. For example, pilot reforms on target prices are being carried out for cotton in Xinjiang and soybeans in Northeast China and Inner Mongolia. In September 2015, the temporary storage purchase price for corn in Northeast China dropped from 1.12 yuan/jin last year to 1 yuan. Corn growers in the three northeastern provinces and Inner Mongolia will therefore see their incomes fall by 20 billion yuan. This involves a complex problem: agricultural product prices must be competitive, but farmers' reasonable interests must not be harmed. That is where the difficulty lies. In this regard, the central government has made clear the guiding ideology for grain price reform, namely that price formation should be determined by the market, and farmers' interests should be guaranteed by the government. This reform will be gradually advanced through the separation of prices and subsidies.

At present there is another view: since China's grain lacks international competitiveness and farmers must also receive large subsidies, can China plant a little less domestically and buy a little more internationally? This is also one way of thinking, but the grain issue cannot be handled with such simple logical reasoning. First, it must be pointed out that the domestic and international grain price gap referred to above is the price gap between grain imported within the tariff quota and domestic grain. But China, like other WTO members, needs to protect its own industrial security and farmers' interests according to the rules. Therefore, we promise to grant tariff preferences when grain imports from the international market are within a certain quantity. This is the tariff quota system. China promises a tariff quota of 9.63 million tons of wheat per year, 7.2 million tons of corn, and 5.32 million tons of rice. If the imported quantity does not exceed this limit, a 1% tariff is applied. But if the quantity exceeds the tariff quota, WTO rules allow China to impose a 65% tariff, so grain imported above the tariff quota would be more expensive than domestic grain. The idea of increasing grain imports is understandable, but the question faced is whether the tariff quota should be abolished. If the tariff quota is not abolished, with a 65% tariff, foreign grain will find it very hard to enter. If it is abolished, it will bring a huge shock and even long-term impact to Chinese agriculture and Chinese farmers.

Therefore, reforms must be carried out in two aspects: first, reform of the price formation mechanism and subsidy methods. Second, reform of the agricultural operation system. Developing scale operations through land transfer is difficult to sustain when grain prices are falling because land rent must be paid. It is precisely against this background that farmers, by developing land shareholding cooperatives, land trusteeship, and other operation forms, have bypassed the land rent problem to carry out scale operations, enabling land contractors and operators to form a mechanism of sharing risks and benefits. This is conducive to expanding the scale of operations and improving competitiveness. This may be one of the directions for future reform of China's agricultural operation system, especially in the production of bulk agricultural products.